McLaren gets tax deduction for Ferrari “Spygate” scandal of 2007

The McLaren Group has successfully argued that the fine levied against it by the FIA five years ago, when its Formula One team was caught with Ferrari's intellectual property, was a tax-deductible business expense.

After Ferrari design documents were found in the possession of Mike Coughlan, at the time McLaren Racing's chief F1 designer, the FIA World Motor Sport Council punished the team by excluding it from the 2007 world championship of constructors and imposed a fine of $100 million. This record fine was later reduced because the team was allowed to deduct its share of 2007 TV income and 2008 travel subsidies from the Formula One group, both of which were lost as a result of its expulsion from the championship. The total that was ultimately paid out as a fine was then valued at just under $52 million.

In submitting its report for its financial year ending on Dec. 31, 2007, which showed a loss of about $53 million, McLaren Racing argued that the fine was not a statutory penalty, but one incurred under FIA rules, making it a business expense. When Her Majesty's Revenue & Customs (HMRC) disagreed, McLaren appealed, leading to a decision being sought from a tax tribunal in London.

HMRC's solicitor, Akash Nawbatt, told the court, "The penalty arose from McLaren's interference with Ferrari's intellectual property. Such interference was not part of McLaren's trade or incidental thereto. The legitimate gathering of information was part of its trade, but the illicit gathering of information was not. McLaren said as much in its submissions to the World Motor Sport Council."

The opinions of two of the court's judges were divided, so the view of the presiding judge decided the matter. In his summary, Judge Charles Hellier stated, "This cost was not one imposed on McLaren, but one which it was contractually obliged to pay under contractual obligations undertaken for the purposes of its trade; it did not result from the action of an external regulator, but from a body to whose dictates it had agreed to submit as part of its trade and in order to gain income . . . The penalty was something which arose from its trade, was connected with its trade, and was incurred wholly and exclusively for the purposes of its trade."

A McLaren statement said, "McLaren Group is a successful U.K. company, which provides high-quality employment and substantial tax revenue. In 2007, McLaren Racing Ltd. was required to pay a penalty, following a breach of the International Sporting Code of the FIA. After consideration, a government tribunal has found that such a contractual penalty is tax-deductible. As a U.K.-registered company, McLaren will continue to comply with all relevant legislation."

The decision by the tax tribunal has been criticized by the Tax Justice Network, a British organization that campaigns for the closure of the nation's many tax loopholes. Its director, John Christensen, commented, “From a taxpayer's point of view, it's extraordinary that a company found guilty of cheating can have the fine deducted from its bill, so that the taxpayer loses out as a result of its activities.”